The Supply Glut in Crude Oil is Not Ending Anytime Soon

The supply glut that has crippled crude oil prices for much of the last two years is still very much in place and oil prices might not start going up anytime soon. Last week, global crude oil prices crashed into the $40’s range after hedge funds, investors, and other stakeholders started panicking about the prospects of oil.

Last Friday, the global Brent for June delivery declined a massive 2.30% to $51.77 per barrel and the West Texas Intermediate for June delivery declined by 2.52% to $49.43 per barrel. In the last one week, both the Brent crude and the West Texas Intermediate have declined by more than 7%. This piece seeks to identify the reasons behind the unending weakness in crude oil prices.

OPEC’s effort to end the supply glut might be futile

Last year, OPEC announced that it has worked out a deal between cartel members and some other oil-producing countries to end the supply glut in oil. In January, the cartel announced that it has recorded more than 80% compliance on the proposed cuts. However, recent market reports suggest that the production cut hasn’t done much to end the glut in crude oil supplies.

To start with, U.S. producers added new rigs for the 14th straight week according to a Baker Hughes report for the week ending April 22. In fact, U.S. rig count increased by about 40% in the first quarter compared to the same period in 2016. U.S. Shale oil production is also at its highest level since August 2015. U.S. oil producers are pumping out record volume of oil; hence, OPEC’s production cuts have not been able to do much to end the supply glut.

However, stakeholders within OPEC are leaning towards the possibility of extending the cuts into the second half of the year. A number of OPEC members are recommending an extension that will deepen cuts by 1.8 million barrels per day – we will know if OPEC will end or extend cuts when it meets on May 25.

Here’s what analysts think about the prospects of oil

Analysts have started weighing in on where they think the crude oil market is headed. As it is to be expected, there’s a mix of bullish and bearish sentiment on how the demand-supply imbalance in crude oil might pan out.

On the bearish side, last week’s sudden price dip is giving traders and investors the hibbie jibbies about the volatile nature of the markets. Andre Riley, in a recent market commentary at Saxon Trade observed that “the increase in U.S. gasoline supplies for the first time since February and a nine-week straight increase in U.S. crude production are encouraging oil shorts to place increased bearish bets on crude oil.”

Another analyst, Bjarne Schieldrop, chief commodities analyst at Nordic bank observes that oil prices will remain depressed going forward because OPEC is not likely to extend its supply cuts. He noted that OPEC is becoming increasingly vulnerable to “more stimulus of the U.S. shale oil sector.”

Interestingly, analysts at Goldman Sachs have observed the increased short side interest triggered panic selloff that weakened oil prices. Damien Courvalin and Jeffrey Currie in a Goldman Sachs report noted that “we view technicals rather than fundamentals as the driver of this move lower.” The analysts also noted that there’s no fundamental basis for the sudden dip in oil prices because OPEC was already making progress in its bid to end the supply glut.